Full-Cost Pricing and the Illusion of Satisficing

JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH, Vol 9, 1997

Posted: 18 Jun 1997

See all articles by David Burgstahler

David Burgstahler

University of Washington

Eric W. Noreen

University of Washington

Abstract

This paper demonstrates that for a multi-product firm with fixed costs, full-cost markup rules impose a constraint on the relationship among product prices that may prevent the firm from achieving satisfactory profits even when satisfactory profits are feasible. For any given cost structure and allocation basis, there always exist well- behaved demand curves such that feasible satisfactory profits cannot be realized using a full-cost pricing strategy. Consequently, there is no guarantee that setting prices via a full-cost pricing strategy will yield a satisfactory profit--even when it is possible to earn satisfactory profits using a different pricing strategy. Factors that might mitigate concerns about full-cost pricing also are discussed.

JEL Classification: M40, M46, D40

Suggested Citation

Burgstahler, David C. and Noreen, Eric W., Full-Cost Pricing and the Illusion of Satisficing. JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH, Vol 9, 1997, Available at SSRN: https://ssrn.com/abstract=8505

David C. Burgstahler (Contact Author)

University of Washington ( email )

555 Paccar Hall, Box 353226
Seattle, WA 98195-3226
United States
206-543-6316 (Phone)
206-685-9392 (Fax)

Eric W. Noreen

University of Washington ( email )

231 Mackenzie Hall
Seattle, WA 98195
United States
206-543-4869 (Phone)
206-685-9392 (Fax)

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